(Bloomberg) – Former Treasury Secretary Lawrence Summers said Federal Reserve policymakers should emphasize that a renewed acceleration in rate hikes this month is possible after a series of robust economic data.
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“The Fed should have the door wide open right now for a 50 basis point move in March,” Summers said on Bloomberg Television’s “Wall Street Week” with David Westin. “A reasonable estimate of where the Fed stands would say it hasn’t been that far behind the curve in about a year.”
Futures markets are suggesting little chance of a 50 basis point move at the Fed’s March 21-22 monetary policy meeting, with a 25 basis point move fully priced in. Policymakers slowed the pace of hikes to a quarter point last month.
Fed Chair Jerome Powell “has an important opportunity” next week — when he will testify on the economy in congressional hearings — “to reset expectations and address the Fed’s growing credibility issues,” Summers said.
Powell and his colleagues don’t have to move half a percentage point yet, said Summers, a Harvard professor and a paid contributor to Bloomberg Television. He said policymakers should look at next Friday’s jobs report and the market reaction before making a decision.
Six recent shocks have hampered the soft-landing possibility the Fed has been seeking, according to Summers:
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CPI seasonal revisions, which removed the downward trend in inflation from data for the final months of 2022.
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January’s CPI showed an acceleration in inflation.
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The price index for private consumer spending also rose.
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January economic indicators are “reading strong”.
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Wage numbers “no longer show the kind of cuts that we expected.”
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The surge in Treasury yields, with 10-year rates climbing above 4%
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Again, “Team Transitory’s arguments have unfortunately looked more like wishful thinking,” said Summers, who has also said in recent weeks that there was a risk of a sudden economic slowdown.
“I was very disappointed to see some of the Fed’s speeches that seemed to leave March off the table as a possible place for 50,” Summers said. “I hope Fed leadership will guide agnosticism about the possibility of a 50 basis point move in March.”
Summers also criticized a push by progressive Democrats to shape President Joe Biden’s election for the now-open position of Fed vice chairman. Massachusetts Sen. Elizabeth Warren wants Biden to elect a vice chairman to counter Powell, who, she said, “has made it clear that he will take extreme steps on interest rates and is willing to help millions of people.” to be unemployed”.
Read more: The Fed becomes the progressives’ punching bag as Biden weighs next election
That campaign will prove counterproductive because, in the short term, “incumbents will want to look like they haven’t been pushed around,” and the Fed will want to demonstrate its independence in the face of any political pressure, Summers said. Over time, signs of “politicizing” the Fed could push medium-term inflation expectations higher and push up longer-term yields and hence mortgage rates, he said.
“This is really a very misguided and problematic strategy for progressives, even if you think the most important thing is lower interest rates and stimulating the economy,” he said. “So I hope they back off from this kind of public campaign.”
(Adds comment on progressives’ push for Fed appointment in last three paragraphs.)
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